Many hurdles on way to Asia

The ambitious economic goals set by the federal government in its Asian Century white paper can only be achieved if Australian business comes to the party and does the bulk of the heavy lifting.

The centrepiece of the paper is to lift Australia’s real income per capita from $62,000 in 2012, which ranks us No. 13 in the world, to $70,000 by 2025, which would put us in the world’s top 10.

That will require Australia to lift its labour productivity growth to levels not seen since the 1990s when it was running at an average annual growth rate of 2.1 per cent thanks to big structural reforms. Productivity growth, which has been stagnant for about a decade, would have to increase by half a percentage point a year above the current business-as-usual rate if the ambitious target is to be met.

This will have to occur at the same time as the workforce ages, which will lower the labour participation rate. Another drag on productivity will be the continuing decline in the terms of trade, which will lower national income.

So can Australian business deliver a return to the golden years of productivity growth? Will the recommended changes to boardroom composition of the top 200 companies, including having a third of directors with deep experience in Asia, make a difference?

Will the government be able to deliver on its promise of being a smooth facilitator in Asia for the private sector? Can business rely on government to improve Asian language literacy and lift the standard of high school and university education? Can the infrastructure bottlenecks such as Sydney Airport be fixed?

Those questions highlight the fact that a whole lot of disparate and complex forces will have to be aligned in order to create the conditions for business to carry the flag for the Asian century.

Some of the issues are virtually impossible to solve. For example, it is doubtful if there will be a decision on a second Sydney Airport before the end of the decade. Also, reform of education is caught up in the electoral cycle. However, at least there appears to be bipartisan support for teaching of Asian languages in primary and secondary school.

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The white paper, crafted by former Treasury secretary Ken Henry, provides a very good blueprint for attacking the opportunities presented by Asia’s economic boom.

That boom will see Asia overtake the economic output of Europe and North America combined by the end of the decade. By early next decade the combined output of China and India will exceed that of the Group of Seven richest industrial countries.

Henry’s voice shines through in most of the white paper, but occasionally the tone shifts to the sort of rhetorical language more suited to a document listing the federal government’s achievements.

The white paper is optimistic about the ability of business to lift its performance and grab hold of the Asian opportunity. It puts great store in the quality of Australian management.

“Through their continuous learning and experimentation with employees, suppliers and customers, businesses are the cornerstone of innovation-based economies and the main avenue through which the benefits of innovation are shared," the paper says.

It concludes that Australia’s large and small companies will be smart enough to be innovative in changing their business models. Also, it is confident they will come up with creative products that will be in demand in Asia.

The white paper does not forecast a dramatic transformation in the composition of Australia’s exports in the 13 years leading up to 2025. The trading profile will still be dominated by the sale of commodities.

Mining is forecast to comprise about 60 per cent of exports to Asia in 2015 and about 65 per cent in 2025. Manufacturing is forecast to be about 30 per cent of exports to Asia in 2015 and about 15 per cent by 2025.

Services, which comprise about 80 per cent of the Australian economy, are forecast to rise from about 8 per cent of exports to Asia in 2015 to about 10 per cent by 2020. The remainder of exports are food and agriculture.

The outlook for services could actually turn out to be much better than anticipated by the white paper.

Law firms such as King & Wood Mallesons and Baker and McKenzie have moved fast to build their Asian operations. In doing so they have provided a model for commercial engagement with the region.

King & Wood Mallesons’ global managing partner, Stuart Fuller, who commutes between Sydney, Hong Kong and Beijing, says the management structures necessary for succeeding in Asia have to be collaborative.

He says there is a particular mindset required for success in Asia and this is something that is not well understood by those who always look at commercial transactions from the point of view of what they can gain.

Asian business requires having an awareness of the perspective of the other party. He says Australia needs to reduce the regulatory barriers that inhibit cross-border investment, increase the integration of capital markets in Australia and Asia and support the development of efficient and coordinated market regulation.

Baker and McKenzie’s Australian managing partner, Chris Freeland, says getting the people-to-people aspect of Asian engagement right is essential, particularly in services exports.

Law is one of many services exports that is hindered by government regulation on the taxation of individuals. Moving people around organisations with offices throughout Asia is important, but made difficult by complex Australian laws.

In financial services the government needs to lift its game if the aspirations in the white paper are to come to fruition. This is important because finance and insurance are the largest industry in the Australian economy.

The government has dithered when it comes to lifting the barriers to greater activity in Asia by Australian financial services companies.

For example, the Johnston Report written by former Macquarie Bank deputy chairman Mark Johnston, included a number of recommendations that have yet to be acted upon.

While the government has passed legislation to implement reforms to managed investment trusts, it has yet to respond to a Board of Taxation review of collective investment vehicles submitted almost a year ago.

That reform is needed because foreign investors struggle to understand the Australian trust investment structure. There are other bugbears in financial services, such as the big moves in withholding, tax which went from 30 per cent to 7.5 per cent and then back to 15 per cent in the last federal budget.

The much anticipated Asian Region Funds Passport is hostage to the APEC process but, as revealed here, at least it has the support of a leading regulatory official in China.

One area where the federal government deserves credit is in its efforts to encourage greater Australian participation in the fast growing renminbi (RMB) market in Hong Kong.

About 25 per cent of Australian trade with China is in RMB but only about 1 per cent of this is actually financed by Australian companies in RMB. The white paper says the government is working with China to support the internationalisation of its currency.

Time is of the essence in this area because of competition from other financial centres, according to James Hogan, head of commercial banking at HSBC Australia. He says Australia has an opportunity to secure a position in a market that will grow strongly as China opens up its financial markets. HSBC handled about a quarter of RMB funding in Hong Kong over the past year.

Australian companies trading with China will be able to remove the currency risk if they finance their activities in RMB.

The white paper announced one new initiative to assist small business and that is a change to the mandate of the Export Finance and Insurance Corporation. The paper said its new mandate “will ensure more of its resources are directed to addressing market failures that impede small and medium-sized exporters in emerging and frontier markets such as China, Indonesia, India, Mongolia and Kazakhstan."

This reform to the operation of EFIC has been in the works for several years. It has been held back by the apparent belief among politicians that EFIC should not be promoting finance that may shift jobs offshore.

But the new mandate will mean that up to $1 billion a year in government guaranteed funding will be available for Australian small and medium sized companies wanting to establish factories in Asia or extend their supply chain in the region.

It is fitting that the white paper envisages addressing the productivity challenge by building on Australia’s success as a multicultural society with a “well managed migration program".